It is not news that Chinese labor authorities have been cracking down on employers that fail to make social insurance payments for their employees. What is news is that Chinese labor authorities are taking that enforcement to the next level.
Last week, 28 government departments (including the National Development and Reform Commission, the People’s Bank of China, the Ministry of Human Resources and Social Security, and the State Administration of Taxation) jointly executed a Memorandum of Understanding on Joint Punishment against Serious Dishonest Enterprises and Related Personnel in the Social Insurance Sector (the “MOU”) that defines “serious dishonest employer behavior” to include the following:
1. Failing to participate in social insurance in accordance with the law and refusing to rectify the situation.
2. Failing to truthfully declare the social insurance contribution base and refusing to rectify the situation.
3. Failing to pay social insurance premiums.
4. Concealing, transferring, misappropriating or embezzling social insurance premiums, funds or engaging in illegal investment operations.
5. Participating in fraud by, among other things, falsifying certification materials or social insurance fund expenses or social insurance benefits.
6. Illegally obtaining, selling or disguising trading of social insurance personal rights and interests data.
7. Refusing to assist the social insurance administrative department in its efforts to investigate accidents and problems.
8. Refusing to assist the taxation department in its efforts to supervise or inspect social insurance, and failing to provide relevant information related to social insurance.
9. Otherwise violating applicable laws and regulations.
Numbers 1, 2 and 3 above — that is, not paying or under-paying employee social insurance — are the violations our China employment lawyers most often see among foreign employers in China, and even before the MOU, we often saw foreign employers get in trouble for such violations.
The Ministry of Human Resources and Social Security, the State Administration of Taxation and the Medical Security Bureau will pass on information regarding employers that violate the social insurance laws to other Chinese government departments via the national credit information sharing platform and publish that information on Credit China, China’s National Enterprise Credit Information Publicity System, and on the official websites of these government agencies. In other words, the dishonest parties will be publicly named and shamed.
Employers/relevant personnel determined by Chinese government authorities to be dishonest may face a number of adverse consequences imposed by different government departments –not just limited to social insurance. Punishment might include restrictions on participating in government procurement as a supplier, financial subsidies and social security funds support, government assistance on streamlining the handling of social insurance, and participating in social insurance cooperation projects. The list of potential punishments also includes enhanced scrutiny or regulations. For example, when a dishonest enterprise applies for customs-related business, its import/export activities will be more strictly supervised and regulated, such as more stringent customs inspection, supervision and audit. The relevant authorities will also consider the “dishonest behavior” of the employer, its legal representative, actual controlling person, directors, supervisors, officers, and senior management in determining whether to grant preferential policy support. Punishment also may include prohibitions on purchasing airplane tickets and withdrawals of previous honors (e.g., taking back a previously-awarded model of high morality honor).
It is therefore more important than ever that you understand and comply with China’s social insurance requirements. The below is intended to help you do exactly that.
China Social Insurance Law Basics
Chinese law requires employers provide their employees certain mandatory benefits, including social insurance. China has five types of social insurance: pension, medical, unemployment, maternity and work-related injury insurance. The specific types of social insurance employers must provide and their contribution formulas vary depending on the employer’s location. Many foreign employers in China do not realize that failing to make full payments on required social insurance gives their employees the legal right to unilaterally terminate the employment agreement without providing any prior notice and then turn around and sue the employer for damages.
China has several forms of social insurance violations. You obviously violate the law if you don’t pay any social insurance at all, but the violations by foreign employers in China we usually see are more subtle and complicated than that. We see violations when employers fail to pay social insurance for the entire term of employment. This violation often happens when the employer thinks it need not pay social insurance during an employee’s probation period. We also see violations involving employers failing to pay all five types of social insurance. And with rising wages in China, we have lately been seeing a rash of employer problems arising from paying social insurance based on a lower salary than is actually being paid, either because the employer failed to update the salary amount or because it intentionally reported a lower salary so as to reduce its employer contribution. These are the sorts of things we constantly look for in our HR audits.
Employees may consent to the employer claiming a lower salary but that is irrelevant once caught or even once reported by the employee who consented. In a case out of Jiangsu Province, the court reinstated the employer’s obligation to pay for all required types of social insurance at full rates the entire time. I am simplifying the facts for this post, but basically the employee’s monthly salary was higher than 7000 RMB, and the employer contributed social insurance as though the salary had been 2200 RMB. The employee terminated the employment relationship and sued the employer for severance, claiming he had been forced to leave his job because the employer failed to pay mandatory social insurance. The case went from labor arbitration, to trial, to appeal and then the employer petitioned for re-consideration by the Jiangsu Province High People’s Court. The employer lost every single step of the way (which really should have been no surprise to any experienced China employment lawyer, sorry!) and was required — among other things — to pay the employee for statutory severance.
Each step of the litigation process, the employer made the following three (futile) arguments. One, the employee never objected to the misstating of the employee’s salary or the underpayment of the social insurance. Two, because the employee never voiced any objection to the social insurance payment arrangement, the parties essentially agreed on a different base for social insurance payments. Three, the employer’s failure to contribute the full amount of social insurance was not the same thing as failing to make any contributions at all, so the employee was not entitled to statutory severance. The Jiangsu Province High People’s Court rejected all arguments and explicitly stated that the laws on social insurance are clear and the employer’s failure to contribute the full amounts based on the employee’s actual wages entitled the employee to terminate the employment contract and receive statutory severance pay from his employer.
To reiterate what is becoming a fairly regular theme of our China employment law posts, most China employment laws cannot be contracted away and an employee’s written consent does not change that. An employee’s written acknowledgement that they specifically asked for a particular employment arrangement also does not change that.
As a foreign company doing business in China, you are under a microscope and you will be treated differently than domestic Chinese companies. This means you are both more likely to get caught on employer violations and more likely to get called out and treated harshly when caught.